THE LOCAL arm of cigarette maker Philip Morris International expects sales to the domestic market to grow by 2%-4% this year, better than the flat performance in 2009.

But it warned that if the Finance department pushes through with a new system to track tax payments, industry-wide sales might fall further, after recording a 10%-15% decline last year.

“I’m hoping this year will be better. We will grow in line with the industry … which will grow 2%-4%,” Chris Nelson, Philip Morris Philippines Manufacturing, Inc. managing director, told reporters in a briefing yesterday.

Growth will occur because there will be no increases in excise tax rates, Mr. Nelson said.

Under Republic Act No. 9334, which set tobacco excise tax rates six years ago, the next hike for vice taxes will be held off until 2011. Rates were adjusted last year.

Mr. Nelson said the optimistic outlook would hold as long as the government delays the new stamp-based tracking system for excise tax payments.

Early last year, the Finance department’s Bureau of Internal Revenue (BIR) began seeking counterproposals to Swiss firm SICPA Holding SA’s P10.1-billion bid to administer the system. It will require each cigarette pack to have a tamper-proof stamp that can be scanned to check whether taxes were paid.

In November, the House of Representatives’ ways and means committee advised the BIR to postpone the bidding, noting that the cost of the tracking system would be shouldered by cigarette consumers and manufacturers.

“It would have a severe impact. You can see another [industry sales] decline of 5%-7% or even 13%,” Mr. Nelson said.

“The major beneficiary [of that system] is the company that will supply the stamps. The BIR has admitted it will cost P0.52 a pack which [it says] will be passed on to the consumer. That will obviously affect demand,” Mr. Nelson said.

Tracking could instead be based an audit of tobacco leaf purchases, he said.

The new system will discourage future investments into the cigarette industry, Mr. Nelson said, pointing to Philip Morris’ $500-million expansion of a tobacco leaf warehouse in Subic free port.

The firm held groundbreaking ceremonies yesterday for its earlier announced expansion project.

The new 20,000-square-meter warehouse at the Subic Technopark will begin receiving leaf shipments by August. It will consolidate storage operations scattered across the region.

It will serve manufacturing sites in Tanauan, Batangas, which can churn out up to 35 billion sticks a year, and also in Malaysia and Indonesia.

The expansion will increase the firm’s leaf storage capacity to 20,000 metric tons compared to just 6,000 from an existing warehouse in Subic’s Boton area.

The new warehouse will have “state-of-the-art” features such as humidity control, fire suppression equipment, and air-conditioning to handle the imported tobacco leaf from China, Indonesia, Thailand and India.

“We have space [at our Subic Technopark lot] for an additional facility that can store [another] 10,000 tons. [The decision to expand again] will depend on demand and how we work out our supply and purchasing,” Mr. Nelson said.

Mr. Nelson said Subic free port was chosen among several other locations in Southeast Asia “as it provides reasonable advantages in cost and efficiency over the various storage areas where tobacco leaf were previously kept.”

Aside from selling locally, the cigarette maker also exports to Thailand. Mr. Nelson reiterated that sales there, however, have been falling by as much as 20% annually because of a long unresolved taxation dispute with the Thai government.

The Philippines has a case at the World Trade Organization against its Southeast Asian neighbor for its tax regime which allegedly discriminates against foreign-made cigarettes.

“It is reasonable to see a conclusion [to the case] in four to five months,” Mr. Nelson said.

Philip Morris holds over 15% of the international adult smoking market, excluding China. It invested more than $300 million in the construction of a cigarette manufacturing facility in Tanauan, which became operational in 2003.

Affiliates manufacture and market seven of the top 15 best-selling international brands including Marlboro brand, the world’s number one cigarette brand.